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Only 29% of European insurers understand the impact of central clearing, according to new BNY Mellon-sponsored research

New research by BNY Mellon, the global leader in investment management and investment services, and Insurance Risk magazine has identified growing pressure on firms as they face more intense demands on collateral, with fewer firms convinced they hold enough assets of suitable quality compared with previous years.

The third annual BNY Mellon/Insurance Risk collateral management survey highlights that European insurers still have work to do in respect of understanding the full implications of the move to central clearing before it becomes effective in the summer of 2016.

Only 29% of European respondents said they understood the impact of the move to central clearing and are moving towards operational readiness; in contrast 75% of US respondents consider themselves fully prepared, with the remainder saying they are still carrying out their impact assessment. Close to a quarter (23%) of European respondents are yet to launch an impact assessment, with 18% saying they do not believe they will be impacted by the changes.

The pressures facing insurers is demonstrated by the fact that only 15% of all firms polled said they are comfortably holding enough assets of the requisite quality to meet collateral posting obligations; this compares to  25% last year and 41% in 2012.

While the survey indicates that the impact of central clearing in the US has been relatively benign thus far – with 40% of US respondents saying they either hold enough assets or comfortably hold enough assets to meet their posting obligations – the figure today for European insurers is 25%. Critically, only 8% of European firms said they expect to hold enough assets or comfortably hold enough assets once the reforms come into play.

Other key findings in the survey included:

  • Whereas last year 47% of insurers stated that they did not post initial margin on OTC derivatives, that figure has now fallen to 32% – a decline that is even more pronounced in the case of North American respondents (29% of North American respondents).
  • Confidence around using the repo market as a tool for collateral optimisation has fallen markedly. Just 16.6% of those surveyed said they used the repo market, or intended to do so, to meet collateral requirements, down from 45% two years ago.
  • Only 29% of US respondents view a cleared environment as an opportunity to generate income, with 57% saying they saw no such opportunity. This contrasts with the picture in Europe, where 39% of respondents felt it presented an opportunity, compared to 50% who saw no opportunity.

Paul Traynor, head of Insurance, International at BNY Mellon, said: "This year's survey more starkly points to regional differences, driven by asset allocation choices, the extent of usage of derivatives and EMIR's and Dodd Frank's differing timelines. North American respondents' confidence in their ability to operate in this new environment has risen as they have conquered the detail and operationalised facilitating processes, such as collateral optimisation. The Europeans, who were originally less troubled by the proposals, given their historically more limited use of derivatives and their large holdings of sovereign bonds, conversely have grown more nervous as they have progressed through their impact assessments."

Kurt Woetzel, CEO of BNY Mellon Markets Group, said: "With the US regulatory environment being at an advanced stage and more clearly understood, many North American firms have already moved from contemplating collateral optimisation techniques to actually putting them into practice. In addition, 20% of North American respondents have invested in technology to allow the use of 'cost of opportunity revenue lost' as a proxy for 'most efficient collateral', while one in five North American firms have integrated their collateral management and margining processes across instruments within and across legal entities. We would expect a similar picture to emerge in Europe over time, once insurers in the region become EMIR compliant."

The survey encompasses responses from 111 insurers, of which 59% are active in the life sector, 64% in the non-life sector and 17% in reinsurance. Forty-four per cent of those taking part write business in the Americas and more than 75% do so in Europe; 40% write business in Asia-Pacific. The survey represents a broad cross-section of insurers by size, with 13% holding more than $500 billion in assets, 36% holding between $25 billion and $500 billion and the remainder of the sample holding $25 billion or less. As a group, the firms polled hold approximately $9.88 trillion in assets compared with $7.45 trillion for the sample last year.